What’s Brexit got to do with MegaBrew?

With the referendum on Britain’s membership of the EU to take place on 23 June 2016, investors in SABMiller will soon have to make up their minds which offer to accept: AB-InBev divided its GBP 71 billion (USD 110 billion) bid for SABMiller into two formats. Investors could either take GBP 44 in cash for each SABMiller share or they could receive a mix of cash and AB-InBev shares worth GBP 41.85 at the time of the announcement.

Initially, this cash and stock offer didn’t look exciting since it was at a discount to the all-cash option and moreover was subject to a five-year lock-up.

Nonetheless, it had a big attraction for those wanting to stay invested, especially SABMiller’s biggest shareholders, the U.S. tobacco firm Altria and Colombia’s Santo Domingo family, the previous owners of the Bavaria brewery. At the time Altria said the structure was tax-efficient, while the Santo Domingos got a strategic interest in the world’s major brewer.

Today, however, the cash and stock offer appears attractive to a far larger group of investors. The weakness of the UK’s currency has pushed the value of the part stock offer up to GBP 46 per share.

Right now, Bloomberg says, “the GBP 2 spread probably isn’t big enough to make independent shareholders shun GBP 44 per share in cash for a large chunk of AB-InBev shares they can’t sell until 2021. But what if the premium widens and becomes seriously alluring? That’s possible if sterling weakens further around the UK’s referendum on European Union membership, or if AB-InBev stock rallies.”

Shrewdly, AB-InBev envisaged such eventualities when putting together the bid. Even considering that every SABMiller shareholder went for the stock and cash option, their allocations would be scaled back pro-rata as AB-InBev has capped it at 42 percent of the overall payment.

The losers would be Altria and the Santo Domingos. According to Bloomberg, Altria would end up with only 4.5 percent of the enlarged AB-InBev instead of the anticipated 11 percent, while the Santo Domingos would get 2.4 percent instead of the expected 5.7 percent.

It seems like things could get exciting over the next few months.

According to an FT poll on 29 March 2016, the gap between the pro-EU and the Brexit camp is narrowing. Only 45 percent of Brits were in favour of staying in the EU, whereas 42 percent were in favour of a Brexit. Economists have warned that if Britain voted to leave the EU, the pound could slide against the euro to levels above GBP 0.90.

Brexit worries: GBP versus EUR (January – March 2016)